Comments. Contact: Volker Stolberg Telephone: Fax: Berlin, 11 April 2014

Transcription

1 Comments by the German Banking Industry Committee 1 on the Communication from the Commission to the European Parliament and the Council on Long-Term Financing of the European economy Contact: Volker Stolberg Telephone: Fax: stolberg@bvr.de Berlin, 11 April 2014 The German Banking Industry Committee (GBIC) is the joint committee operated by the central associations of the German banking industry. These associations are the Bundesverband der Deutschen Volksbanken und Raiffeisenbanken (BVR), for the cooperative banks, the Bundesverband deutscher Banken (BdB), for the private commercial banks, the Bundesverband Öffentlicher Banken Deutschlands (VÖB), for the public-sector banks, the Deutscher Sparkassen- und Giroverband (DSGV), for the savings banks finance group, and the Verband deutscher Pfandbriefbanken (vdp), for the Pfandbrief banks. Collectively, they represent more than 2,000 banks. Coordinator: Bundesverband der Deutschen Volksbanken und Raiffeisenbanken e. V. Schellingstraße Berlin Telefon: Telefax: EU Transparency Register ID:

2 Seite 2 von 9 I. Introductory comments On 27 March 2014, further to its Green Paper "Long-Term presented on 25 March 2013, the Commission published a Communication to the European Parliament and the Council. During the public consultation round, the German Banking Industry Committee (GBIC) had submitted its comments on the Green Paper on 25 June The Communication of the European Commission on long-term financing of the European economy also revisits a number of aspects already covered by the European Parliament s own-initiative report of 26 February 2014 (cf. also GBIC comments submitted on 7 January 2014 during the previous consultation round held by the European Parliament s Committee for Economic and Monetary Affairs). The German Banking Industry Committee appreciates the present opportunity to submit its comments on the Communication by the European Commission on long-term financing of the European economy. Our comments below were also guided by Germany s coalition government agreement Creating Germany s future concluded after the last elections among Germany s ruling coalition parties CDU, CSU and SPD for the 18 th legislative period. As far as SME financing is concerned, the coalition parties state in the coalition agreement: "We shall seek to ensure classical SME financing through savings banks, cooperative banks, private banks and development banks as well as mutual guarantee institutions. (Coalition agreement, page 21) II. Comments The GBIC shares the view expressed in the Commission Communication that long-term investments are of pivotal importance for sustainable economic growth. To this end, there has to be a sufficient supply of longer-term financing. At this juncture, it is worth noting that Germany s SME sector is the most innovative driver for employment in Germany. It is instrumental in keeping the value chain in Germany as a business location. The GBIC particularly welcomes the proposed analysis of the impact which the existing regulatory measures have on the economy's credit supply and the corresponding growth opportunities (along with a potential review of the respective rules if and when necessary). We subscribe to the Commission s view that there is a need to find the right balance between regulatory needs on the one hand and, on the other hand, the capacity of European banks to perform their traditional role as intermediaries also in the future. This area of activity is extremely important for the national economy; there shall and may not be any unnecessary impairment thereof. The Communication of 27 March 2014 announces a review of the appropriateness of the capital adequacy requirements in the context of long-term financing which shall also have an impact on the final calibration of the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR). All of this has to be subject to the above caveat. The German Banking Industry Committee thus shares the European Commission s view, i.e. that particularly SMEs and high quality infrastructure are indispensable for sustainable growth. In recent years for instance in Germany there has been excessively low public spending on infrastructure. Hence, in order to close the investment gap in Germany and Europe which erodes the attractiveness as a business location, policymakers should accelerate their infrastructure investments. Whilst, in its Commission Communication, the European Commission estimated the infrastructure investment needs for transport, energy and telecom networks of EU importance (including fast broadband connections) at EUR 1 trillion for the period up to 2020, the GBIC holds the view that this is still a rather conservative estimate; in our understanding, given the considerable investment backlog, more likely than not, the real investment need required for closing the gap is even higher. In their capacity as growth and employment drivers, SMEs are key contributors to the GDP. As regards external financing of long-term investments, the overwhelming part of SMEs rely on loans by their house banks. One of the lessons learnt by the German economy (with its strong SME backbone) during the economic crisis 2008/2009 was that stable house bank connections are an important precondition for the availability especially of longer-term finance. It is worth noting that the UK - in a departure from its traditionally strong focus on capital markets has developed an extremely keen interest in the German

3 Seite 3 von 9 house bank system. Also, the fact that other European countries are interested in establishing development banks is evidence of the fact that, given its diversification, the banking structure prevailing in Germany proved stable both before and after the financial crisis. Generally speaking, when it comes to long-term financing of the European economy, there is a need to clearly differentiate between the financing of SMEs on the one hand and, on the other hand, investments in long-term projects (e.g. infrastructure or the transition from fossile fuels and nuclear energy towards a more sustainable energy policy). This distinction has an impact both on the definition of long-term maturity and, simultaneously, on the group of potential investors interested in financing. As far as investors are concerned, there would have to be a breakdown into the categories "equity investors and debt investors. In principle, we share the view expressed by the European Commission, i.e. that banks play a significant role as sources of long-term financing. However, we do not agree with the European Commission s assessment that the traditionally strong reliance on bank sources of financing obstructed the availability of financial resources to companies. On a European level, policymakers criticised the high ratio of bank loans in corporate financing and called for alternative, non-bank sources of financing. This petition ignores the reality of the well functioning corporate financing sector in Germany and in many other EU Member States. Whilst it may be true that parts of the EU are haunted by an excessively low availability of long-term financing, this lack is due to the present high economic uncertainty and the limited capabilities of the banking systems in the peripheral Member States which is accompanied by the extraordinary interest rate environment that is the result of an extremely expansive monetary policy. At the same time, there is clear evidence of a profound loss of investor confidence which can be explained only in part by the loss of confidence in the financial industry. The EU and its individual Member States have to make further progress in resolving the pivotal macroeconomic problems; whilst not limited to, this particularly applies to the national budgets and it is a conditio sine qua non for a renewed interest of citizens and corporations in long-term investments. As long as the persisting complexities give rise to major uncertainty concerning the future economic development in the euro zone in terms of the price development or, moreover, the risk of potentially deflationary trends, depositors and investors will only respond in a very sluggish manner to political expectations regarding long-term exposures. In light of this overarching problem, the EU can best promote consolidation efforts whilst simultaneously furthering growth amongst its citizens and enterprises by promoting the reform efforts in its Member States to the best of its abilities. After all, unless the reform efforts are successful, the ECB will not be able to exit again from the crisis mode. Hence an unwarranted preferential treatment of non-bank sources of finance and thus, in the final analysis, market distortion, will not give rise to any positive incentives. Rather, a deliberate promotion of alternative non-bank sources of finance involves huge risks for financial market stability. Also future regulation shall and may not impair the banks ability to provide their clients with those corporate loans and financial services they demand, thus strengthening a business model that is at the service of the SME sector and which, at the same time, has local roots. All of these premises are met by the house bank principle. In an attempt to promote long-term financing, the European Commission suggests specific measures in six key areas. The GBIC would like to submit the following more specific comments on these measures: 1. Mobilising private sources of long-term financing The European Commission recognises the significant role played by banks in the provision of long-term financing. In its Communication it argues that tightened liquidity rules which are a corollary of the new own funds rules must find the right balance and cautions against any excessive restrictions on maturity transformation discouraging long-term financing. As far as the liquidity ratios for the banks are

4 Seite 4 von 9 concerned, the GBIC would like to call for an appropriate balance in order to avoid any negative repercussions on corporate financing and the financing of the public sector. In order to overcome unwanted side-effects of the new regulatory framework at the expense of long-term credit relationships, we also perceive an urgent need for a critical review or, moreover, recast of the CRR requirements with regard to long-term financing. In addition to bank lending, the European Commission quite rightly attaches major importance to diversification by means of non-bank sources of financing such as institutional investors including insurance companies, pension funds, traditional or alternative investment funds, sovereign funds or foundations. By means of its proposal for an amendment to the Directive on the activities and the supervision of institutions for occupational retirement provision (IORPs) published simultaneously on 27 March 2014, the European Commission seeks to promote long-term investment. We welcome this proposal on the following counts: The introduction of organisational and other measures to increase the security of the institutions for occupational retirement provision which are an important group of capital market players This includes requiring these institutions to commission a custodian bank or, moreover, depositary; after all, this is a best practice that has been tested and tried also in the field of the European regulated investment funds (AIF, UCITS) Improved information of employees by virtue of a new pension benefit statement aimed at enhanced transparency regarding the benefits earned Reflection of the increasing importance of defined contribution systems Enlargement of investment opportunities for long-term investments Refraining from any new liquidity rules Facilitating cross-border activities of institutions for occupational retirement provision Particularly in terms of competition, the GBIC has strong reservations with regard to the European Commission s plans: The GBIC doubts the effectiveness of promoting cross-border deposits by introducing a government sponsored EU savings deposit account. In Germany, there is a healthy competition for customer deposits. Any State interference (such as the one proposed above) would have an adverse effect on the financial market and the credit supply in Germany. Based on the foregoing, the study of possible market failures and other shortcomings announced by the European Commission and other shortcomings regarding cross-border flows of savings should also cover depositors demands for secure domestic investments. 2. Making better use of public funding We share the view expressed by the European Commission that national and regional promotional banks can play an important role in stimulating private finance along with the EIB/EIF. The European Commission s objective of simplifying approaches and optimising synergies as well as complementarities between multilateral development banks and national promotional banks is commendable. One policy that has proven successful in Germany is that promotional banks (in their capacity as instruments of government action) have to comply with the socio-political objectives of their public entities and that state aid shall be provided in those areas where the market does not yield any satisfactory results. This is also reflected in the promotional banks business activity. This year, the European Commission plans to publish a communication on promotional banks. We hold the view, that this publication should also describe the tested and tried development structures within member States (as well as the German development system at the national and state/local level). Furthermore, it will be possible to draw upon the experience from the cooperation between national promotional banks and financing partners with the EIB and the EIF. At this juncture, the goal should consist in building trust in tested and tried structures as well as offering assistance and expertise (best practice) for other member states whenever there is still a lack of a capable promotional infrastructure. This also has to be reflected in the implementation of European development programmes (e.g. Horizon

5 Seite 5 von or COSME) and in the use of the financial instruments. The development policy objectives can best be achieved if these preconditions are met. However, we have certain reservations over the modernisation of the EU state aid legislation which started in Whilst the European Commission seeks to simplify the state aid regime, the amendments adopted to date lead to more restrictive rules for promotional activities. Yet, a 1:1 implementation of the amendments to the moot points which are currently under discussion would result in aid regimes that are clearly even more onerous. Government export credit guarantee schemes protect companies against the political and economic risk of a loan loss resulting from export transactions. Hence, these schemes play an important role in longterm foreign trade financing transactions. Whilst the European Commission s aim of better coordination and cooperation between existing national export credit systems is entirely warranted in view of increasingly decentralised value chains and a growing number of multi-sourcing projects (e.g. exports, in which the components come from several countries), it is, however, equally necessary to avoid any weakening of national export credit guarantee schemes (e.g. the tried and tested HERMES guarantee schemes in Germany). 3. Developing European capital markets The European Commission plans to facilitate SME s access to capital markets. However, more likely than not, for most SME s financing in the capital markets is bound to be overly complex, too expensive and subject to an excessive amount of rules and regulations (e.g. minimum volumes, reporting and disclosure obligations). An arbitrary promotion of capital market financing aimed at weakening the importance of banks is potentially dangerous: Such an approach might ignore the companies genuine needs and might accelerate the development of said shadow banking activities that lack a comparable degree of regulation. Usually, for SME s, debt-financed investments tend to be more useful since such an approach facilitates a more individual match between the funding transaction and the corporate clients requirements. For instance, Germany generally features a higher share of debt-financed investments. To date, there are no signs of a credit squeeze - neither in the SME sector nor in the public sector. Even if the underlying rationale consists in facilitating access especially for SMEs, access to corporate financing through the capital market might still remain more costly than conventional debt-finance. Whilst not limited to, this is inter alia owed to the high number of additional transaction parties. Already today, companies can opt in favour of more financing by means of capital market instruments; whenever appropriate, they already use this option. At this juncture, the support offered by universal banks (i.e. one-stop-shop approach ) has been tried and tested for decades and should not be abandoned; this is also in the best interest of SME s. The European Commission announced a study on the creation of a liquid and transparent secondary market in corporate bonds trading. In our view, this should remain the prerogative of competition between trading venues. We welcome the fact that the present Commission Communication announces a review of the Prospectus Directive. Furthermore, the GBIC welcomes the endeavours by the European Commission to strengthen the European securitisation market by creating a high quality segment. We explicitly agree with the analysis that the key obstacle towards market recovery consists in the ongoing overregulation and that it is also due to the subsequent uncertainty amongst market participants. Furthermore, the current regulatory initiatives (risk weightings, LCR, rating regulation etc.) massively jeopardise also those segments which still function well; whilst not limited to, this particularly applies to automotive ABS as well as NL/UK RMBS. At this point, there is a clear need for a risk adequate capital backing of ABS as well as clear and simple regulatory requirements. The creation of a high quality segment makes sense if corresponding improvements can be achieved regarding the above issues. On the other hand, the GBIC holds the view that pleas for general support or state guarantees are not capable of rekindling trust in the market. Rather, there is a need for more specific steps. Two of them shall be mentioned by way of example at this point:

6 Seite 6 von 9 1.) A ban on discriminatory risk weighting of ABS compared to other financing products (this also includes the current proposals regarding the capital adequacy requirements for prime securitisations among insurers that effectively exclude ABS investments). 2.) Recognition of certain ABS in the LCR. As regards the definition of the high quality segment, we suggest that this should be modelled on the existing industry initiatives such as the True Sale Initiative (TSI) or Prime Collateralised Securities (PCS). These initiatives were precious trailblazers. In the meantime, they have earned a reputation as a seal of quality in the market. Concerning the provision of venture capital as an alternative source of financing for risky investments it is worth noting that banks and insurance companies act both as financial intermediaries and, at the same time, as experienced investors. Hence, this leads to a very fundamental question: Whether there is a need for a simplification in the area of regulation as a precondition for incentives for banks and insurance companies to become involved in the field of venture capital. This involves a review of the appropriateness of the capital adequacy requirements for such investments. As regards investments into SME s or larger corporations / projects, there should be a reflection of their heterogeneous risk potential. Last but not least, the German Banking Industry Committee welcomes the fact that the Commission recognises the importance of covered bonds as a pivotal and tried and tested funding tool for long-term investments in real estate and state-owned as well as quasi-state-owned areas which are collateralised by high quality cover assets. Also, if a further convergence of national covered bond systems appears desirable, there needs to be a careful review of a statutorily driven integration of the covered bond markets. During this process any harm to individual instruments or the market segment on the whole needs to be avoided. Hence we advocate against a full harmonisation of the European covered bond markets. Rather, the announced reviews should be confined to high-level principles, for instance regarding assets eligible for cover, valuation issues / exposure limits, special banking supervision, transparency requirements and the insolvency remoteness of creditor rights in the event of an issuer s insolvency. On the one hand, minimum harmonisation based on principles would be able to ensure the minimum quality requirements whilst, on the other hand, this would equally take account of established markets which, in part, have been functioning extremely well already for centuries. 4. Improving SME s access to financing For years, there have not been any signs of any underdevelopment of or danger to long-term financing for the (SME) economy in Germany. Hence, we hold the view that the assessment made by the European Commission is incorrect, i.e. we doubt that the particular dependence of SME s on credit financing was the reason for an exceedingly strong burden for SME s during the crisis. Rather, we hold the view that the European Commission s hypothesis is more plausible according to which contrary to Germany obtaining loans is more challenging in countries featuring a fragmented banking sector. Hence, in the interest of the SME economy, the house bank principle which proved successful in Germany should be reviewed as a financing model also in the respective EU Member States and measures should be adopted in order to strengthen it, whenever appropriate. The GBIC does not subscribe to the view expressed in the Commission Communication that the lack of adequate, comparable, reliable and readily available credit information on SME s constitutes a hurdle which has traditionally made SME s more dependent on local bank financing. Rather, German banks anchored in the regions have proven to be reliable financing partners for their SME target customers. This was evidenced both, when the economy was performing well but also during times of stress (like the one experienced during the last financial crisis). The European Commission plans to review a broader availability of credit information within the meaning of a formalised approach (for instance external scoring) or, moreover, a harmonisation and increase of comparability. At this point, it is worth noting that, for most SME s, this is neither manageable nor

7 Seite 7 von 9 financially feasible. Such approaches are only suitable for larger companies, i.e. companies which are also eligible for capital market transactions. Crowdfunding is a new financing instrument. In its simultaneous Crowdfunding Communication, the European Commission points out that crowdfunding may complement other traditional ways of financing by providing access to high-exposure financing transactions in the field of innovative, creative and cultural projects or activities of social entrepreneurs. Crowdfunding is intended to provide a new funding option particularly to start-ups and young enterprises. Along with access to financing, the model promises social marketing through communication on a platform which is intended to improve subsequent sales of the company s products. The feedback provided by the crowd investors is frequently also viewed as a market test (social proof of concept) for the corporate model or business model. Hence, depending on the specific scenario, some companies seeking financing may indeed benefit. However, it is also worth noting that, from the point of view of investors, crowd investing constitutes a high risk investment involving a potential loss of the entire capital employed. Hence, it is at best suitable for experienced investors capable of sufficiently assessing the risks behind such investments. The Commission Communication on crowdfunding is an expression of the political desire to promote this new financing form and comes to the conclusion that, for the time being, there is no need for regulatory action. The GBIC would like to point out that for the sake of investor protection there is an indispensable need for ensuring the comparability of the protective measures for investors featuring other investment forms. Particularly in light of the currently low interest rate level which incurs the danger of misallocations and the formation of bubbles, the promotion of crowdfunding shall and may not be assigned a higher priority than investor protection as well as consumer protection. Regarding this highrisk form of investment, the planned introduction of a "quality seal might help to promote transparency to potential crowd investors. On the whole, regarding crowdfunding there is but little market experience. Hence, we explicitly welcome the initiative by the European Commission aimed at a more profound review of this issue. In the final analysis, the model s success will become evident in a number of years once first participations expire. The comprehensive legal and regulatory issues presented particularly regarding cross-border activities of crowdfunding platforms still require further clarification. The GBIC supports the European Commission in its endeavours aimed at closely monitoring the development of crowdfunding markets and its envisaged regular reviews concerning the need for further action potentially including legislative measures. This assessment is also pivotal in determining whether the contemplated employment of public funds (as a coinvestment to private resources procured by crowdfunding) may be premature or whether this should be considered an option. Concerning this matter, page 22 of the coalition agreement for the Federal Republic of Germany sets out: "Also new forms of financing such as crowdfunding ( swarm finance ) need a reliable legal framework. 5. Attracting private finance to infrastructure delivering Europe 2020 The GBIC supports the European Commission s plan of encouraging competent authorities across the entire EU to include the private sector (for instance in the form of public private partnerships (PPP)) during the implementation of their public infrastructure projects (provided there is a corresponding economic benefit). The focus on life cycle costs and life cycle revenue of public assets is an expression of an infrastructure management which is geared towards sustainability. 6. Enhancing the wider framework for sustainable finance We share the European Commission s assessment that the general business and regulatory environment is important for domestic as well as for cross-border investments. However, rules for companies on corporate governance principles, on accounting and on tax as well as legal framework conditions shall and may not incur excessive administrative burdens for companies because this would erode their investment propensity.

8 Seite 8 von 9 The Commission Communication addresses the rule for accounting of financial instruments (IFRS 9) which constitutes along with IFRS 13, fair value measurement, the central accounting standard for financial sector enterprises rendering their accounts according to international standards. Currently, the accounting and valuation of financial instruments is being re-regulated under IFRS 9. IFRS 9 can be subdivided into stage 1 (classification and valuation), stage 2 (impairment and risk provision) and stage 3 (accounting for general hedge relations). Initially, stage 3 also envisaged rules on accounting for portfolio hedging relations which, however, have been singled out into a separate project. During stage 1, financial instruments will be classified into three measurement categories. The allocation to a measurement category is based on the underlying business model of the financial instrument and on properties of the contractual payment flows. The measurement is based either on the underlying fair value where changes in value go into Other Comprehensive Income (FVOIC) or on the fair value where changes in value are reflected in Fair Value through Profit or Loss (FVTPL) or at Amortised Cost (AC). More likely than not, long-term financing transactions will be assigned to the AC category. Hence, the rules discussed for impairments and risk provisioning are highly relevant. In its stage 2 deliberations, the IASB revisits criticism levelled at the existing standard IAS 39 according to which value adjustments are allegedly made too late or excessively low. Hence, the IASB proposes a model which is based on the expected deterioration of the underlying exposure s creditworthiness. The model features three stages during which the level of the expected losses shall be calculated over different periods of time. In stage 1, this will be the next 12 months, whilst in stages 2 and 3 the remaining time to maturity shall be used. Volatility during the economic cycle may lead to a shift from stage 1 to 2 or 3; ceteris paribus, there will be a considerable increase in the impairment need. However, as opposed to the FASB model which is equally being discussed, we have supported the IASB model. The GBIC is of the opinion that the classification categories envisaged under IFRS 9 essentially provide a true and fair view on the balance sheet. However, we remain concerned over the impact of cyclical volatility during the creation of impairments for long-term financing. Yet, there has been a repeated and in-depth discussion of the arguments. Hence, the GBIC advocates in favour of a timely finalisation of IFRS 9 along with a swift and unqualified endorsement. We see no need for the planned consultation on the creation of a single accounting standard for small and medium-sized companies. In order to ensure a functioning European single market, when preparing their consolidated financial statements, application of the international accounting standard IFRS has been mandatory for capital market oriented companies already since 2005; at this point, the statements already allow a comparison. It is doubtful whether a comprehensive harmonisation of the accounting rules for small and medium-sized companies in Europe is useful at the present point in time. Within the European Union, harmonisation is still absent from the entire governance and regulatory structure. For instance, within the EU Member States, taxation, executive remuneration, profit appropriation, capital maintenance rules and covenants in loan agreements are not regulated in a uniform manner. Due to the fact that the SME economy is modelling its accounting precisely on those existing rules, accounting in Europe is still highly heterogeneous. Major problems also result from the lack of harmonisation between the different legal forms of incorporation and the corresponding accounting approaches for own funds. As long as the legal and economic framework conditions in Europe feature such material differences, smaller and medium-sized companies need to be able to accommodate the country specific governance structure through their accounting approaches lest there will be serious economic frictions. Hence, a harmonisation of the accounting approaches can merely be the final step in the harmonisation process it cannot possibly come first. This means that, at present, the creation of a uniform IFRS accounting standard for small and medium-sized companies is unpreferable for us. Taxation on the basis of the economic capabilities needs to factor in any investments debt financing costs. Notwithstanding the foregoing, in 2008, the German legislator decided to limit the tax deductibility of interest paid. As a result, interest costs are only fully (100%) deductible up to the amount of interest income for the same year. The tax deductibility of the net interest costs exceeding interest income for the year is limited to 30% of the taxable income before interest income, interest expenditure, income tax, and depreciations (EBITDA). Interest expenditure which exceeds this 30% cap shall not be deducted in the year in which it was generated; instead, it will be added to the profit as an off-balance sheet item. The interest expenditure which cannot be deducted shall be calculated separately by the competent revenue authorities; it will be carried into following years as a so-called interest carryforward. This rule

9 Seite 9 von 9 has incisive consequences for the overall economy; hence, we cannot recommend it as a general standard. In recent years, researchers have repeatedly conducted studies on the promotion of equity financing by deducting a fictitious return on equity from the tax basis. The underlying rationale was a reduction of the tax discrimination of own funds compared to debt capital.